calpers actuarial valuation reports (as of june 30, 2019)
TRANSCRIPT
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Pension Funding Tahoe City Public Utility District, CA
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Building Blocks of Pension Funding
Educate
Your agency is updated on the annual CalPERS investment return
Analyze
Quantify impact of final discount rate decision
Present
Develop funding policy
Adopt
Formally adopt and implement funding policy
Administer
Monitor funding policy to ensure fiscal stability and growth
Evaluate
Revisit funding policy
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Understanding Pension Funding
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Pension Basics Hurdles and Other Considerations
Next Steps How is your agency doing relative to your funding targets?
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Pension Basics
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Pension Jargon Glossary
• Assumption = Target, Goals or Expected Results • Experience = Actual Results
• Normal Cost = Initial savings rate (Employee and Employer contributions)• Present Value of Projected Benefit (PVPB) = Savings goal at desired retirement age
• Accrued Liability (AL) = Target funding progress at a given point of time• Unfunded Accrued Liability (UAL) = Amount actual savings falls short of funding goal
• Amortization of UAL = Annual amount needed to get back on track
• Annual Required Contribution = Normal Cost + Amortization of UAL• Discount Rate = Long-term assumed Investment Rate of Return
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What Is the Discount Rate?
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Interest rate fixed by the CalPERS Board for the purposes determining the value of future promised benefits (liabilities)
Synonymous with long-term, assumed investment rate of return
Used to calculate or “discount”value of future expected future-
benefit payments.
It helps determine how much do we need in the bank today to grow
to our desired savings goal.
Informed by Capital Market Assumptionsand selected by the Board from a range
of actuarially sound options
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Assumptions Set Future Cost & Funding Expectations
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Economic• Inflation• Investment Return• Salary Growth
Demographic• Retirement• Disability• Death• Termination
Major Driver of Plan Cost and Affordability
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Public Employer Reform Act (PEPRA) of 2012Lower Prospective Benefits Effective Jan 1, 2013
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• In 2012, the California legislature passed the Public Employees’ Pension Reform Act (PEPRA), championed by former Gov. Jerry Brown. PEPRA took effect January 1, 2013 and places limits on the level of pension benefits.
• While this reform is significant, due to a provision in the California constitution often referred to as the “California Rule,” the PEPRA limitation only applies to employees hired after January 1, 2013 AND are either new to the pension system or had a break in service in excess of 6 months.
• Therefore, the impact of PEPRA will not provide employers significant relief for decades to come.
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200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55
EE & ER Contributions (Normal Cost Only) Actual Investment Earnings Unfunded Liability Target Balance (Accrued Liability)
Accrued Liability(Target funding progress at a static point in time)
Investment Earnings +
Normal CostContributions
Present Value of Projected Benefit(Funding target at desired retirement age)
Retirement Plans Are Sensitive to Investment Earnings
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200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55
EE & ER Contributions (Normal Cost Only) Actual Investment Earnings Unfunded Liability Target Balance (Accrued Liability)
Accrued Liability(Target funding progress at a static point in time)
Investment Earnings +
Normal CostContributions
Present Value of Projected Benefit(Funding target at desired retirement age)
Retirement Plans Are Sensitive to Investment Earnings
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UAL(Amount of Assets Short of Funding Target)
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Illustration of Mortality Risk for an Individual Employee
$(1,000,000)
$(800,000)
$(600,000)
$(400,000)
$(200,000)
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
25 30 35 40 45 50 55 60 65 70 75 80 85
Retirement ContributionRetirement PaymentsEmployer retains risk of employee outliving original life expectancy
Expected Service Life Expected Retirement Life
Present Value of Projected Benefit (Savings Goal)
Accrued Liability(Target funding progress
at a point in time)
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Historical Factors Impacting Funded Status
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Source: CalPERS
Challenge Yourself to Look Beyond What You See Today
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Hurdles & Considerations
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CalPERS Investment Return: 21.3%
(Preliminary Estimate)
Investment Return Triggers Lower Discount Rate Provision of Funding Risk Mitigation Policy
New Discount Rate 6.8% Heading into ALM Deliberations Final Decisions Expected November 2021
https://www.calpers.ca.gov/docs/funding-risk-mitigation-policy.pdf
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Funding Risk Mitigation Policy - Still in Place*6.8% Discount Rate Heading Into ALM Deliberations Nov 21
* While the CalPERS Board may elect to implement something different, the current policy suggests that the board should reduce the discount rate 20 bps to 6.8%. https://www.calpers.ca.gov/docs/funding-risk-mitigation-policy.pdf
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Stay Tuned, Stay Informed, Stay Engaged
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CalPERS Historic Investment Returns
-3.1%
35.4%
24.6%
13.8%
3.9%
15.7%
9.7%6.5%
12.5%14.5%
2.0%
16.3%15.3%
20.1%19.5%
12.5%10.5%
-7.2% -6.1%
3.7%
16.6%12.3%
11.8%
19.1%
-5.1%
-24.0%
13.3%
21.7%
0.1%
13.2% 18.4%
2.4%
0.6%
11.2%
8.6%6.7%
4.7%
21.30%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%19
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2021
Plan Year Ending June 30
Actual Discount Rate
Dot Com Crash
Great Recession
20-Year Annualized Rate of Return 6.9%
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What is Happening When?• CalPERS Board Expected to Adopt New Discount Rate November 2021• Assets and Liabilities Adjusted in 2021 Valuation (Next Fiscal Year for Most Plans)• Net Positive Impact to Funded Status Under Almost Every Conceivable Scenario• Contribution Rate Impact Begins FY 22-23 Schools & State, FY 23-24 Local Agencies
All subject to CalPERS Board Decisions
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How is Your Agency Doing?
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Historical Plan Funded
Status(Millions)
FUNDING PROGRESSFiscal Year Ended
(FYE) 2016 2017 2018 2019 2020Accrued Liability
(AL) $35,578,684 $37,474,539 $40,942,676 $42,919,587 $45,018,448Market Value of
Assets (MVA) $25,095,014 $27,005,461 $28,961,275 $30,357,096 $31,426,015
Unfunded Accrued Liability (UAL) 10,483,670 10,469,078 11,981,401 12,562,491 13,592,433 Funded Status 70.53% 72.06% 70.74% 70.73% 69.81%
INVESTMENT RETURNAssumption 7.39% 7.25% 7.00% 7.00% 7.00%
Actual Experience 0.6% 11.2% 8.6% 6.7% 4.7%Experience
Gain/Loss -6.79% 3.95% 1.60% -0.30% -2.30%
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2021-21 Plan Funded Status Projections(Millions)
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6/30/2020 6/30/2021Scenarios Status Quo A B C D E
Investment Return 7% 7% 21.3% 21.3% 21.3% 21.3% 21.3%Discount Rate 7% 7% 7% 6.8% 6.5% 6.25% 6%
Mark Value of Assets (MVA) $31 $32 $36 $36 $36 $36 $36Accrued Liability (AL) $45 $45 $45 $46 $48 $50 $51Unfunded Liability (UAL) $13 $13 $9 $10 $12 $13 $15
Funded Status (FS) 70% 71% 80% 78% 75% 72% 71%
Scenario Notes:
A Favorable investment return increases MVA $4 Million and increases funded status 9% from status quo.B Baseline: 6.8% discount rate increases AL $1 million and reduces funded status 2% from scenario A (Favorable Investment Return).C 6.5% discount rate increases AL $3 million and reduces funded status 5% from scenario A (Favorable Investment Return).D 6.25% discount rate increases AL $5 million and reduces funded status 8% from scenario A (Favorable Investment Return).E 6.0% discount rate increases AL $6 million and reduces funded status 9% from scenario A (Favorable Investment Return).
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Total Required Employer – Before Favorable Investment Return and Lower Discount Rate Change
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Cost Impact on Annual Employer ContributionBaseline Assumption 6.8% Discount Rate Baseline Assumption 6.8% Discount Rate
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Cost Impact on Annual Employer ContributionBaseline Assumption 6.5% Discount Rate
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Cost Impact on Annual Employer ContributionBaseline Assumption 6.25% Discount Rate
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Next Steps
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An Over-Abundance of Uncertainty
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Proceed Cautiously
The corona crisis has been a prompt for change. How will these changes impact your agency’s finances?
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GFOA’s Triple-A Approach to Uncertainty
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• Accept• Uncertainty is inevitable
• Assess• Find potential impact, using reference
cases – historical or analogues• Augment
• Uncertainty will usually be underestimated!
Source: GFOA
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Known Threats
• More Pandemic Waves• Geopolitical Risks• Political Gridlock on Further Stimulus• Low Fixed Income Yields• Inflation• Low Fixed Income Yields• Significant Market Correction or slow reversion to the
mean• Unknown, unknowns but we know you are out there
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Why are Funding Policies Important• Pension obligations are expensive and can become a serious financial threat to
agencies without regular and appropriate attention;• Pensions require long-term management therefore it is important to develop
pension management strategies memorialize practices;• Provides guidance in making annual budget decisions;• Demonstrates prudent financial management practices;• Reassures bond rating agencies; and• Shows employees and the public how pensions will be funded
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Building Blocks of Pension Funding
Educate
Your agency is updated on the annual CalPERS investment return
Analyze
Quantify impact of final discount rate decision
Present
Develop funding policy
Adopt
Formally adopt and implement funding policy
Administer
Monitor funding policy to ensure fiscal stability and growth
Evaluate
Revisit funding policy
31
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Questions
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